How do you create a Language Technology company worth USD $20 million in eight years? Ans: Invest $80 million. Such was the fate of Idiom Technologies, the apparent market leader in Translation Management Systems which sold out to SDL for $21.4 million after receiving combined investment rounds of nearly four times that amount. More recently SDL acquired Machine Translation vendor Language Weaver for $42.5 million. The Weaver's $12.2M of revenue for the calendar year ending 2009 included a loss of $1.0 million.
Why the massive gulf in valuations? Both companies sold language technology and both companies made losses. The difference lies in perception. And dreams.
TMS is a technology that is hard to define and understand. Even its name has changed over the years, being the technology formerly known as “GMS” or “GCMS”. Whatever the acronym, the TMS promise of automating Translation Management is not easy to grasp and remains difficult in practice to fully realize. The potential valuation of MT, if it can deliver quality, is far higher than the total annual value of the localization industry (more than USD $20 billion). Never mind that MT is a long way from delivering on its promise, just the chance of being part of the dream technology draws valuations that far exceed those of lowly automation software.
Which brings us to the Languages Services Providers. Lionbridge is by some margin the largest LSP with over USD $400 million in annual revenues, growing higher every year. What stratospheric valuation would be placed on the market leader in a fast growing industry?
Since it is listed on the NASDAQ we know the answer: six months of revenues.
This miserable valuation affects the market worth of every LSP that has tried to raise funds. If the market leader is only worth 0.5 times revenues, why would any similar company be worth more? It's not as if Lionbridge always makes losses, it often strings back to back quarters of profit, before the familiar report of losses due to “one time charges” “currency movements” and “restructuring”.
Why is Our Industry Leader in Such Bad Shape?
My guess:
- The company was built by round after round of mergers. Despite all the restructuring their revenue per employee numbers suggests that there is still more to cut.
- Lionbridge's approach to technology changes every year. They spend less than 1% of revenues on R&D and did not follow SDL in making many acquisitions of technologies (of course they did not have the cash to do this). They used technology partners then developed their own, then opened that technology to everyone with Geoworkz.com. Seems that they have not settled on a strategy.
- Large production operations in China and India have not really cut costs or won new clients. Labor costs in both countries are rising at over 15% per annum and the cultural and practical barriers to efficiency are significant. We don't see that much revenues are being generated in those countries either.
- Lionbridge has a greater range of services with ambition throughout the content creation cycle. This vision is much harder to implement than rival SDL which tends to offer lower rates and uses its size and ownership of technology as crude but effective weapons.
Can Lionbridge solve its problems and be consistently profitable? We hope so, but for now we see the fastest growth in mid-sized companies like Andovar who can offer lower rates than Lionbridge while enjoying comfortable profits.
